Posted Date: December 13, 2018

Author:  Federal Student Aid

Subject: Closed School Discharge Changes

The 2016 borrower defense regulations at 81 FR 75926 amended the William D. Ford Federal Direct Loan (Direct Loan), Federal Family Education Loan (FFEL), and Federal Perkins Loan (Perkins Loan) program regulations to provide for the automatic discharge of loans if, among other things, a borrower could not complete his or her program of study because the borrower’s school closed. The 2016 borrower defense regulations also added new closed school discharge requirements for loan holders, guaranty agencies, and schools.

Automatic Closed School Discharge

New regulations at 34 CFR 685.214(c) (Direct Loan Program), 34 CFR 682.402(d)(8)(ii) (FFEL Program), and 34 CFR 674.33(g)(ii) (Perkins Loan Program) provide for an automatic discharge of some or all of the Direct Loan, FFEL, or Perkins Loan program loans an eligible borrower (or, if applicable, the dependent child on whose behalf a parent took out a PLUS loan) obtained to attend a school that closed on or after November 1, 2013. A borrower is eligible for an automatic closed school discharge if the borrower

  • was enrolled when the school closed; or

  • withdrew not more than 120 days before the school closed; or

  • if approved by the U.S. Department of Education (the Department), withdrew more than 120 days before the school closed; and

  • did not enroll at another Title IV-eligible school within three years of the date the borrower’s prior school closed.

Although this loan discharge is granted automatically after three years have passed since the school’s closure, nothing prevents an eligible borrower from applying for and receiving a closed school discharge as soon as the school’s official closure date is confirmed by the Department. Therefore, borrowers who 1) attended a school that closed less than three years ago, 2) meet the eligibility requirements for a closed school discharge, and 3) want their loans discharged may apply for a closed school discharge now instead of waiting for three years to receive an automatic closed school discharge.

In addition, borrowers who do not receive an automatic closed school discharge based on their attendance at a school that closed three or more years ago, but who otherwise meet the eligibility requirements for a closed school discharge, should submit a closed school discharge application to their loan holder.

As a reminder, when loan holders grant a closed school discharge, any payments made on the discharged loans are applied to the outstanding balance on the borrower’s account and/or returned to the person who made the payments. In addition, information related to a discharged loan and its payment history are removed from the borrower’s credit report.

Implementation of Automatic Closed School Discharge

We will use loan disbursement and enrollment information contained in the National Student Loan Data System (NSLDS®) to identify borrowers who are eligible for an automatic closed school discharge.

For FFEL Program loans not held by the Department, we will execute a query on a monthly basis and securely transmit to FFEL Program guaranty agencies information about the borrowers and loans eligible for an automatic closed school discharge. In the short term, we will provide the data through direct outreach to guaranty agencies that need to receive it. In the long term, we will add a new, monthly report that guaranty agencies will access via NSLDS. We will communicate with the FFEL community when we are ready to implement the new report.

To date, the Department has identified approximately 15,000 borrowers who are eligible for an automatic closed school discharge based on their (or in the case of a PLUS loan, their child’s) attendance at a school that closed between November 1, 2013, and December 4, 2015. About half of those borrowers received loans for attendance at Corinthian Colleges, Inc. (Corinthian) schools that closed on April 27, 2015. The approximate amount of loans that will be automatically discharged is $150 million, of which approximately $80 million is attributable to loans taken out by borrowers who attended the above mentioned Corinthian schools.

Note: Previously, the Department used its regulatory authority to approve closed school discharges for borrowers who withdrew from Corinthian schools more than 120 days before the school closure date. Accordingly, we have included borrowers who withdrew from Corinthian schools on or after June 20, 2014, as eligible for an automatic closed school discharge.

Some borrowers who will receive an automatic closed school discharge previously submitted requests for discharge of the same loans under the borrower defense to repayment provisions. The Department will close any pending borrower defense claim that is no longer relevant because a closed school discharge has been granted and notify the affected borrower of that closure.

On Friday, Dec. 14, 2018, we will begin emailing borrowers to inform them that the company that handles billing and other services related to their federal student loans will discharge some or all of the borrower’s loans within the next 30–90 days. The email notes that certain discharges may take longer than 90 days to complete, explains that borrowers will be notified of the specific loans discharged, and provides contact information for borrowers who have questions.

While we are emailing closed school discharge pre-notifications to borrowers, official notification of discharge completion will be provided to borrowers by loan holders.

Other Changes Related to Closed School Discharges

The 2016 borrower defense regulations added the following new closed school discharge requirements for loan holders, guaranty agencies, and schools:

Loan Holders – If a borrower who was previously notified that he or she may be eligible for a closed school discharge and provided with a closed school discharge application does not submit a completed closed school discharge application within 60 days after being notified, the new regulations require the loan holder to send the borrower another closed school discharge application and again inform the borrower of the eligibility requirements for discharge.

Guaranty Agencies in the FFEL Program – Borrowers now have the right to request that the Department review guaranty agency denials of their closed school discharge application. If a guaranty agency determines that a borrower who has submitted a closed school discharge application does not qualify for the discharge, the agency must notify the borrower in writing of that determination and the reasons for the determination. This notification must now also explain that the borrower has the option of requesting that the Department review the guaranty agency's determination, and tell the borrower how to request such a review. The Department will implement this provision of the 2016 borrower defense regulations using the same processes that are currently in place for reviewing guaranty agency denials of applications for loan discharge based on false certification of eligibility to borrow.

Schools – Schools must provide all enrolled students with a closed school discharge application and a written disclosure, describing the benefits and consequences of a closed school discharge as an alternative to completing their educational program through a teach-out agreement, immediately upon submitting a teach-out plan after the occurrence of any of the following events:

  • The Department initiates a limitation, suspension, or termination of the participation of a school in any Title IV, HEA program under 34 CFR 600.41 or subpart G of 34 CFR Part 668 or initiates an emergency action under 34 CFR 668.83;

  • The school’s accrediting agency acts to withdraw, terminate, or suspend the accreditation or preaccreditation of the school;

  • The school’s State licensing or authorizing agency revokes the school's license or legal authorization to provide an educational program;

  • The school intends to close a location that provides 100 percent of at least one program; or

  • The school otherwise intends to cease operations.

Contact Information

We thank all schools and program participants for their continued support of the Title IV programs.

FFEL Program guaranty agencies and schools may contact us at borrower.experience@ed.gov with questions about the

  • transmittal of automatic closed school discharge information to FFEL Program guaranty agencies or

  • closed school discharge review rights for FFEL Program borrowers.

Reminder: Eligible borrowers will be notified by email, and that email will include contact information for their use.

   

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